Managed service proposals from treasury lack focus and clarity experts say

The Edinburgh-based Institute of Chartered Accountants of Scotland (ICAS) has called on HM Treasury to ensure that the proposed new legislation to combat tax avoidance by managed service companies should be ''better focused'' on those guilty of abuse. Others feel it lacks clarity.

''The legislation proposed by the Government is indeed somewhat obscure,'' says Roger Sinclair, a legal consultant specialising in contractor issues. ''We do hope that the consultation process currently underway will help to clarify a number of issues.''

Some Criteria Difficult to Apply

For example, the criteria set out to distingusih certain types of managed service companies from personal service companies are difficult to apply, as the ICAS points out.

What troubles the observers is that the Government is paying lip service to the more flexible model for the workplace of the future, while acting in terms of the workplace model of the past. ''There is a risk that the tax rules will become unduly onerous if they remain focused on working arrangements as they used to be in the past, with increasing layers of complexity being added to apply the old tax regime to modern circumstances. We would prefer to see a modern tax system that reflects present-day working arrangements,'' says John Cairns, convener of the ICAS Corporate Tax Sub-Committee.

The ICAS has called on the Government to put off applying the new provisions for a further year, to allow innocent businesses and individual workers time to rearrange their affairs. ''Otherwise, the new rules risk penalising those for whom they were not intended,'' Cairns explains.

In its written response to the consultative document "Tackling Managed Service Companies," published jointly by the Treasury and HM Revenue & Customs, ICAS supports the Government in its aim of discouraging artificial tax planning by businesses seeking to exploit the laws on employment status. It also agrees with the move to combat flagrant non-compliance by companies which deliberately cease to exist leaving unpaid tax and national insurance liabilities.

An Unwieldy Tax System Already

However, ICAS expresses concern that the proposals add additional complexity and uncertainty to an already unwieldy tax system.

''The Government is entitled to combat employment arrangements that have been designed solely to produce savings in income tax and national insurance contributions. However, we are concerned that the proposals may adversely affect existing service companies established for sound commercial reasons with no particular focus on tax savings,'' Cairns points out.

''We have particular concerns about the way the draft legislation could adversely affect umbrella companies established for sound commercial reasons to engage workers and provide them to third parties, remunerating them fully by way of employment income; it seems unfair that such companies would fall within the definition of managed service companies, and we believe that the proposals may impose new administrative burdens on them because of their need to avoid being adversely affected by the new provisions,'' Cairns continues.

''We are also concerned that the proposals add additional complexity and uncertainty to an already unwieldy tax system. The addition of complicated anti-avoidance provisions of this nature has been shown to make the tax regime unworkable; indeed, these proposals themselves demonstrate the failure of the pre-existing intermediaries legislation.''

ICAS advocates caution on the use of complicated anti avoidance provisions, which in other cases have contributed to making the tax regime unworkable, and points out that these new proposals demonstrate the failure of the ''IR35'' intermediaries legislation that was introduced in 2000.

''Working through a service company with other workers can produce genuine administrative savings, and is in many instances a natural reaction by small businesses to the weight of administration and compliance burdens imposed on them by the Government. We fear that some businesses established to achieve the genuine economies of scale may be caught unwittingly and penalised unfairly by these new provisions,'' Cairns adds.